The Business Roundtable Statement on the Purpose of the Corporation Widening the Lens, a New Social Contract

By: Peter Lupoff | August 27, 2019

On August 19th, Business Roundtable, an association of Chief Executive Officers of America’s leading companies, released its latest Statement on the Purpose of a Corporation. The Statement was signed by 181 CEO’s and is transformational.

Since 1978, Business Roundtable has periodically published Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed shareholder primacy - that corporations exist to serve shareholders. With last week’s announcement, the new Statement supersedes previous statements and outlines a modern standard for corporate responsibility. Specifically, that the signatories are committed to "Widening the Lens" and leading their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders, and further, dismissing short-termism, focusing instead, on building value over the longer term.

The message of the new Statement is in harmony with Net Impact's perspective and even reflects the theme of our NI19 Annual Conference - Widening the Lens (in Detroit this October 24-26th). Our member base is the demographic that the media suggests (and we agree) is demanding this new Social Contract. They want to buy from, work for, and invest in companies that serve a higher purpose than maximizing profit to the possible detriment of people and planet.

System Design for the Empowered, License to Ignore

In a 1970 New York Times Op-Ed article, University of Chicago Economics Professor Milton Friedman wrote, “There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.” This notion of shareholder primacy has persisted in many boardrooms over the last 50 years despite its losing favor, first in academic circles, then some investors, and finally the vast majority of NexGen.

Friedman’s take, that the corporation’s responsibility is to maximize value for its owners, its shareholders solely, missed the complexity of the myriad company relationships that weigh on corporate stability, valuation, and well-being, as well as the nuance in operating in an environment that is in a state of metamorphic change.

Arguably, the rules of the game have changed.

System Design Change to Empower all Stakeholders, License to Operate

In our own history, Net Impact has been advocating that business can be a force for good for 27 years. A broader definition of a company’s constituents, a "Widening of the Lens", from shareholder to the varied array of stakeholders suggests cognizance of the dynamic change in the factors that influence a company’s stability, valuation, and well-being. In Friedman’s time, many companies seized on a shareholder primacy-based definition as a license to ignore the complex, organic eco-system it operated within, in favor of ledger entry as the determinant of success. This is simply not the way the world works today and entreaties to still think this way are driving the car looking in the rearview mirror.

Regarding the Statement, the take of some pundits often ignores the wisdom and economic underpinning in the decision to re-define the Purpose of the Corporation to include a broader definition of the corporation’s “stakeholders” and to look longer-term. Most reporting has focused either on questioning the sincerity or suggesting it’s borne of pragmatism, and, therefore, not from the heart. Neither take is accurate, helpful, and perhaps, relevant.

In behavior speak, there’s the notion of ‘calibration’, which one that is well-calibrated, maps closely to the way the world really works. This is a component of emotional intelligence. Much of the commentary on the Business Roundtable Statement on the Purpose of the Corporation seems to fail to see the reasoning for re-definition, focusing mostly on motives, as if the Corporation is some being, a person, and not a vehicle. This strikes me as particularly out of touch and poorly calibrated to the way the world works. Not surprisingly, cynicism around motive is deepest amongst the older and more establish observers, perhaps either wed to what has been or not entirely aware of what has changed and what is to come.

Millennials and Gen Z, our Net Impact network, (projected to be 75% of the workforce by 2025) are firmly in support of the tenets of the new Statement. In fact, a recent Core Communications survey suggests that:

  • 75% of Millennials would take a pay cut to work for a socially responsible company
  • 76% of Millennials consider a company’s social and environmental commitments before deciding where to work
  • 64% of Millennials won’t take a job if a potential employer doesn’t have strong corporate responsibility practices

The operating landscape has changed. Stewards of Corporations can no longer assume they will attract talented employees if they aren’t attuned to current and future stakeholder/employee’s beliefs.

A New Social Contract

Globally, with one in every four dollars now invested through a Responsibility lens, the investment community (professional) and their clients (individuals) are progressively favoring those companies that score best utilizing Environmental, Social and Governance (“ESG”) screens. Even the corporation’s first favored stakeholder, the shareholder, is increasingly choosing to invest in companies that seek to do well by doing good. Note that with $50 Trillion changing hands inter-generationally in the US over the next 30 years, NexGen is the shareholder-stakeholder that the Business Roundtable is considering with definitional changes of the Statement.

In one of the great indications of a shifting power dynamic in business, the consumer as a stakeholder is demonstrating great influence, wielding purchase decisions predicated on the consumer’s sense of the social responsibility of the company in question. Without getting political, simply look at decisions recently made by Nike, Dicks Sporting Goods, Apple, eBay, Bank of America and others, regarding a public stance on a particular issue. Agree with them or not, but do you really think these decisions are contemplated without considering sales and market consequences? Companies are managing for multiple outcomes, in a more nuanced way, recognizing that it is good business to "Widen the Lens" and consider all stakeholders. There is, in fact, greater stability in embracing this broader stakeholder philosophy, embracing this dynamism, rather than looking only at the profit and loss on the ledger, indifferent to employees, consumers and community, after all, exactly who would a solely bottom-line driven company think the are (in a DNA sense)?

The re-definition of the Purpose of a Corporation recognizes the powerful influence of once lesser-heard voices. A Corporation is not management, nor is it its owners. Widening the lens to listen to the broadest definition of stakeholders is conscious recognition of the Corporation as an entity comprised of myriad stakeholders, all of whom determine who the company is and what it is worth.

Net Impact applauds Business Roundtable for their Statement on the Purpose of the Corporation. In "Widening the Lens" to incorporate a broad definition of stakeholders and state shared objectives and obligation, they are driving system design change through this evolution and calibrating to how the world works and where our Net Impact emerging leaders will take it. We hope to see you all and discuss this further at our NI19, Widening the Lens – Annual Conference in Detroit October 24-26th.

 

 

 

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